My take on fake security is that it might manage to trick the adversary into deciding that the attack is not worth pursuing. If fake security is substantially cheaper than real security, it might still make sense.
http://www.mast.queensu.ca/~nagydani/missdef.pdf
The above reasoning is applied to missile defenses, but basically any defensive measure would do; if the adversary misjudges our defensive capabilities, it would mount an inefficient attack, or even decide against attacking us at all.

Interesting analysis. It's been a few years since I read Spence for class. I'm curious about a few of your observations:

>the task here is not to get the individual to reveal information that he holds to
>his advantage, but to predict something that is otherwise only found out at
>extreme cost

I understand the conceptual distinction, but can you give me an example of a situation in which the latter holds, but the former is not applicable?

>this search for apparent differentiation is countered by the feedback equilibria
>being reached without resort as above

Could you clarify what you mean by this?

>markets based on signaling are inefficient, and the signals themselves are not
>especially correlated with productivity

Doesn't the innefficiency of signaling follow directly from the lack of inherent value in the signal? As I recall, this was an obvious, minor point: if a market necessitates an added cost (education) that does not directly increase value, education is "innefficient." If we start arguing that school improves skills to make better workers, or [bigger picture] keeps younger workers out of the labor force, (or just employs professors who would otherwise drag the economy :) ) then the social equilibria shift, no?

Also, do you have a circulating draft of your paper?

Allan, your first question - Spence's original market was just that: the job market. the task that the employer has is to work out whether a prospective employee is likely to be productive; if we assume that all candidates more or less present themselves well in an interview, we still have a problem in translating that to productivity. In practice the only reliable way is to road test the employee, either on a short term contract or in a "realistic test" scenario. The latter is only a mild predictor, and the former is spoofable ("best behaviour"). In the end, the employee has to invest 1-3 months worth of time (and costs) to find out, which means that it truley is a risky investment.

Allan,

>this search for apparent differentiation is countered by the feedback equilibria
>being reached without resort as above

my original thoughts here were along the lines of, well, if Spence is saying that a good signal is one that is expensive for some and cheap for others, then the task is to select such signals. Consider an MBA - they are quite expensive, but in the US and moving out, it is now possible to do much cheaper MBAs by correspondence, etc. Lowering the cost of the MBA lowers the value of the signal, so this might be considered a bad thing.

Yet, Spence is also saying that stability is reached in the market due to a feedback loop that only shifts on disconfirming information. That is, unless decidedly strong data turns up year after year that says the MBA does not correlate with productivity, then an equilibria is reached on that signal, and it remains a strong one. But, and this is the crucial point, this equilibria is not based on whether the MBA leads to productivity - it might have arisen for other reasons and simply stuck there.

Literally, what Spence is saying is that signals are those things that don't necessarily tell us about productivity directly, but are stuck in a feedback loop as if they tell us about productivity.

So getting back to the first point, there's not much point in working to improve that signal (by for example making sure that an MBA is more expensive). What we really need to do is more subtle; perhaps we should disrupt the feedback loop? Perhaps we need to inject some data, or create new feedback loops? I don't know, and I'm minded to John Boyd's "inside own loop" syndrome here, where he concludes that once an organisation is in this loop, there is no known way to get out.

> Doesn't the innefficiency of signaling follow directly from the lack of inherent value in the signal? As I recall, this was an obvious, minor point: if a market necessitates an added cost (education) that does not directly increase value, education is "innefficient."...

Right, exactly. However one interprets it. But curiously enough, I'm coming at it from a security and net-sources point of view and I've not picked up on that point. To you it might seem a minor point; to me, I had assumed from things people said (!!) that signals were good things. This is a complete change!

Also, I think it overshadows his real point which is that in an insufficient information market, something arises anyway. This is a point I try to bring out in my paper: what and why is that something? how do we identify this, and what can we do about it?

> Also, do you have a circulating draft of your paper?

It's at http://iang.org/papers/market_for_silver_bullets.html

It is at a form where it is cohesive, I just have to rewrite all the parts relating to the herding and so forth to account for Spence's paper. So it is likely to change quite dramatically in detail. I knew in my heart that the things I'd discovered had to have been addressed before so all I'm doing is playing catchup again :)

I also have on my reading list Rothschild&Stiglitz and Vickrey. Unfortunately these papers are not on the net, and I have to trip along to the library to get at them.